U.S. Economy Grew 2.6% in Third Quarter, GDP Report Shows

Trade contributed the most to the third quarter’s turnaround as the U.S. exported more oil and natural gas with the Ukraine war disrupting supplies in Europe. Consumer spending, the economy’s main engine, grew but at a slower pace than in the prior quarter.

Businesses slashed spending on buildings, however, and residential investment fell at a 26.4% annual rate, the department said.

Stocks were mixed after the GDP release and earnings announcements. Treasury yields fell.

Economic uncertainty is growing and many economists are worried about the possibility of a recession in the coming 12 months. They expect the Federal Reserve’s efforts to combat high inflation by raising interest rates will further weigh on the economy.

“The overall state of the economy is deteriorating and a lot of it is just the weight of elevated inflation and higher interest rates,” said Richard F. Moody, chief economist at

Regions Financial Corp.

“I don’t think that we’ve seen the full effects of higher rates work their way through the economy, so that’s why we have pretty low expectations for the next several quarters.”

Contributions to Growth

Net exports and a shrinking trade deficit drove third-quarter growth, while consumers contributed less than they did the previous quarter.

Contributions (pct. pts):

Contributions (pct. pts):

Contributions (pct. pts):

Contributions (pct. pts):

Contributions (pct. pts):

The U.S. isn’t the only part of the world facing economic challenges. The European Central Bank on Thursday raised its key interest rate to 1.5% from 0.75% as it too attempts to tame inflation in a region teetering close to recession.

One of the sectors most sensitive to interest rates—housing—is showing signs of pain. Home sales posted their longest streak of declines in 15 years and the average rate on a 30-year fixed-rate mortgage eclipsed 7% Thursday for the first time in more than 20 years.

Economists don’t expect the third-quarter rise in exports to endure, given a stronger dollar and weakening global economy. Many point to final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, as a sign of a broader economic slowdown. That inched up at a 0.1% annual rate in the third quarter after it rose 0.5% in the second quarter and increased 2.1% in the first quarter.

Some of the economic slowdown this year reflects a return to a more normal rate of growth after the economy last year expanded at an unusually fast pace of 5.7% as it rebounded from earlier pandemic disruptions.

The trajectory of the economy largely depends on how consumers fare in the coming months.

High inflation and rising interest rates haven’t done much to weaken the health of the American consumer, Bank of America Corp. Chief Executive

Brian Moynihan

said in an October earnings call. The company’s data show consumers continue to spend more. They also have more money in the bank than before the pandemic.

Consumers are benefiting from a tight labor market. Employers are holding on to the workers they have, with jobless claims remaining low last week. Many businesses are also ramping up pay as they struggle with staffing shortages.

“Wage growth is up, which is good for consumers, and that helps their balance sheet,” said

Mark Begor,

CEO of the credit-reporting company

Equifax Inc.

on an earnings call this month. “Obviously, inflation is a bad guy, and it is hurting lots of consumers. But even with inflation, consumers are still out there spending and traveling and doing all the things that they do in their lives.”

Still, consumers might be starting to crack. Many are tapping into pandemic savings and turning more to credit cards to finance spending, said

Kathy Bostjancic,

chief U.S. economist at Oxford Economics.

But with higher interest rates, “there’s really a limit to how much consumers can rely on their credit cards,” she said.

Some companies—particularly in sectors that benefited from a consumer-goods binge earlier in the pandemic—are seeing a consumer pullback. Sales are down about 25% so far this year from the same period in 2021 at Altus Brands LLC, said Gary Lemanski, owner of the Grawn, Mich.-based company that manufactures and sells accessories for hunting, shooting and outdoor recreation.

Many of the factors that spurred a sales surge in 2020 and 2021—such as consumers’ extra cash from government stimulus, their time at home to go out in the woods and their lack of ability to spend money on services including travel—have since faded, he said.

Inflation is causing many consumers to cut back on discretionary purchases, which include products Altus sells, such as electronic ear muffs for hearing protection that can go for $200 to $250, Mr. Lemanski said.

“I talk with a lot of folks, and you just hear it over and over again: It’s tougher to make ends meet,” he said.

Many technology companies are feeling the effects of a slowing economy.

Facebook

parent Meta Platforms Inc. posted its second revenue decline in a row, as the social-media company wrestles with tough macroeconomic conditions that are weighing on advertiser spending.

Microsoft Corp.

said it expects a sharp decline in personal-computer sales and the dollar’s strength to continue to weigh on growth.

Inflation is denting some consumers’ appetite for big-ticket purchases. Most Americans say it is a bad time to buy a car or large household goods such as furniture, refrigerators or stoves, with a large share attributing their viewpoint to high prices, University of Michigan survey data show.

CarMax,

a used-car retailer, reported a profit drop of more than 50% in its most recent quarter as tough economic conditions weighed on consumers.

“This quarter reflects widespread pressure the used-car industry is facing,” said

William Nash,

the company’s chief executive, on an earnings call. Higher prices, climbing interest rates and low consumer confidence “all led to a marketwide decline in used-auto sales,” he said.

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com